EU Referendum

Energy: a question of balance


Dominant in the thinking of many people who follow the burgeoning energy crisis is the increasing unreliability of wind generation and the runaway costs of balancing the grid when the wind fails.

One egregious example of this came on 2 November when the grid was so short of power that the Electricity System Operator (ESO), with its control room in Warwickshire, was paying the giant Drax power station £4,050/MWh, against the July wholesale electricity price of £70.59/MWh.

Somewhat behind the curve, we now see the Telegraph pick up the story with a piece written by Rachel Millard, headed: "Britain heads for an energy shock", telling us that: "National Grid ESO, the body responsible for balancing electricity supply and demand, is investigating soaring charges".

The day Millard picks, though, isn't 2 November but the 24th, when the grid was having similar problems. It was a cold day on both sides of the Channel, she writes, and as demand rose, cheap nuclear power from France was not being sent to Britain via the interconnector. Instead, electricity was being sent the other way due to high prices that day in France.

With wind speeds down, coal and gas were once more picking up the load, but at a steep price. Shortages in the morning, though, turned into too much power in the afternoon and by the end of the day, the operators had spent a record £64 million balancing the system.

Millard goes on to say that it was an exceptionally expensive day, but not without warning. ESO is having to spend increasing amounts on system balancing, "heaping costs onto industry and, ultimately, consumer bills".

The costs, she adds, have triggered alarm in the company and among regulators at a time of steeply rising household energy bills, triggering a review by the ESO. It has also raised questions about the design of the market, the readiness of the system to shift to green energy, and whether power stations are profiteering by bidding in with sky-high prices.

What she doesn't say, though, that it isn't just ESO which is getting worried. On 17 August, last year, the regulator Ofgem got involved, noting that the GB electricity system had seen an increase in balancing costs during the spring and summer of 2020, coinciding with the onset of the Covid-19 pandemic.

Specifically, the regulator said, the period from March to July 2020 had seen balancing costs of £718 million, which had been 39 percent higher than the ESO had expected for the period.

These costs, Ofgem noted, had increased at the same time that the nationwide lockdowns had changed consumer electricity consumption behaviour and reduced industrial activity. Moreover, some of this period had also seen high level of renewables output, which had required the ESO to take a large number of actions to balance the system and ensure system operability.

As a result, Ofgem published an open letter stating its intention to evaluate the high balancing costs on the GB electricity system, and to "identify lessons that need to be explored further in order to reduce costs to consumers going forward".

Millard now brings in her own take on the data, telling us that the ESO spent £1.29 billion on this market between April and October 2021, compared to £986 million during the same period in 2020. Monthly costs, she writes. have now breached £200 million for three months in a row.

Actually, that is an understatement. The ESO has published figures up to the end of October and the spend for that last month was £315.61 billion. November is likely to be higher.

According to Millard, the growing need is only part of the picture. She relies on "experts" to point to the high prices commanded by generators, which the ESO has little option other than to pay. Here, she recalls that Drax had been paid £4,000 per MwH to switch its remaining coal turbines in North Yorkshire on during particularly cold and still days since September.

However, these exceptionally high balancing prices are now distorting the entire generation market. While the bulk of power is sold on contract, with fixed prices over agreed terms, many fossil fuel power station owners – squeezed by high gas prices and other costs – are dropping out of the capacity market and registering as balancing services providers.

Even though the wholesale price of power has climbed above £200 per MwH, power station operators have realised that it is far more profitable to sell at the higher rates on offer through the balancing mechanism.

Phil Hewitt, director at market specialists EnAppSys, cited by Millard, believes that roughly 4GW has been switched out of the capacity market to be redesignated as balancing services.

"Typically", Hewitt says, "this means now that National Grid is paying the equivalent of 20p/kWh [spread over the entire power output], to balance the system on days which are not very tight, but where stations have exited the wholesale market to participate in the balancing mechanism".

This, though, is by no means the only distortion creeping into the market, about which Millard is not particularly forthcoming. In an extremely complex market, there are many different types of balancing services required.

There is, for instance, the "enhanced frequency response" where the generator contracts to provide a highly flexible service, responsive within one second to frequency deviations, and able operate in a frequency sensitive mode. This attracts a considerable availability payment, even if the service is not called upon.

Then there is the "firm fast reserve", which provides "rapid and reliable delivery of active power through increasing output from generation", deliverable within 2 minutes at a minimum ramp rate of 25 MW/Min. This is different from the "fast start", where generators attract an availability payment to being able to deliver power, synchronise and achieve full load within 5 minutes of a frequency excursion beyond a pre-set limit.

The ESO lists over 60 different service options, which makes balancing the grid more like conducting a vast orchestra, and is clearly not a task for the fainthearted – or the amateur. The wonder is, with a system so complex, that it works at all. It certainly does need reviewing.

Millard, however, seems to be unaware of the Ofgem review – which does not appear to have reported – although this is difficult to tell amid the welter of reports produced by the regulator.

But, with the ESO having become a legally separate function within the National Grid from 1 April 2019, the whole system has been reviewed, with the report issued in January this year. Admitting that it has not yet considered the specific lessons from the balancing cost increases, it nevertheless concedes that the role of the ESO is "becoming increasingly challenging".

With an eye on "net zero", it reports that, "Balancing an electricity system with a high proportion of intermittent, renewable generation already presents a significant challenge, which has contributed to a significant increase in electricity system balancing costs between 2015 and 2020". It then adds that, "Cost-effective management of an increasingly complex and renewable power system will play an important role in achieving net zero at least cost".

There, we have something that the Telegraph doesn't tell us, that it is the renewables that have "contributed to a significant increase in electricity system balancing costs" – something that should really have been the lead headline.

But more worryingly, in considering "net zero", Ofgem states that "existing market arrangements may need to evolve and innovate to enable a flexible but resilient resource mix and support efficient system balancing".

Noting that "a large fleet of unabated CCGTs is not consistent with achieving a net zero power system", it also states that there could be "significant consumer benefit in developing new long-term approaches to planning how the necessary increase in low carbon flexibility can be incentivised to enable more efficient energy balancing".

Reading between the lines, together with the rest of the report, this rather indicates that effective balancing system for a "low carbon" network have yet to be devised. In her headline, therefore, telling us that: "Britain heads for an energy shock", she was closer that she possibly knew. The only real question is how big.

Also published on Turbulent Times.